Tax experts believe the government is unlikely to increase the standard deduction for salaried taxpayers in Budget 2026, despite growing concerns over rising urban living costs. The standard deduction serves as a crucial tax relief measure for salaried individuals and pensioners, allowing them to reduce taxable income without requiring investment or expense proof.

Current Standard Deduction Structure

The standard deduction varies between India's two tax regimes, providing different levels of relief to taxpayers:

Under the new tax regime, which is now the default option, the standard deduction represents one of the few remaining deductions available to salaried taxpayers as the system moves toward a simpler, exemption-light framework.

Expert Views on Policy Stability

Tax professionals emphasize that policy stability appears to be a key government consideration. Sudhakar Sethuraman, Partner at Deloitte India, noted that the standard deduction for salary income was recently enhanced to ₹75,000 in Finance Act 2024 as part of broader tax-relief measures. He explained that given relatively stable inflation and the policy intent of keeping the new regime simple and predictable, the government may prefer stability in the near term.

Location-Neutral Tax Approach

Experts argue that India's tax framework adopts a location-neutral approach, making deduction increases based on urban living costs unlikely. Neeraj Agarwala, Partner at Nangia & Co LLP, emphasized that tax laws are framed uniformly for the entire country and do not provide deductions based on geographic location, whether urban or rural.

"While the cost of living is undeniably higher in certain metropolitan cities, it remains significantly lower in many other regions. As a result, it is unlikely that the standard deduction would be revised solely to account for urban living costs," Agarwala stated.

Future Considerations

The standard deduction continues to serve as a key tax relief mechanism for salaried taxpayers under the new tax regime. However, any potential changes to the deduction amount will depend on several factors:

• Inflation trends and economic conditions
• Government financial position and revenue requirements
• Overall policy approach toward maintaining tax system simplicity
• Evolving income patterns and work realities

Experts suggest that decisions regarding residence and settlement, despite cost of living variations, remain matters of individual choice, reinforcing the government's uniform tax policy approach across different regions.

Tax policy experts have presented comprehensive recommendations for Budget 2026 to enhance India's mergers and acquisitions environment, particularly with the Income-tax Act, 2025 scheduled for implementation from April 1, 2026. The suggestions aim to address existing regulatory gaps and improve the ease of doing business for M&A transactions.

Fast-Track Demerger Tax Neutrality

A primary recommendation involves extending tax neutrality to fast-track demergers under Section 233 of the Companies Act, 2013. Currently, the Income-tax Act, 2025 provides tax neutrality only to NCLT-approved demergers under Sections 230 to 232, excluding fast-track demergers that enable small or closely held companies to undertake demergers without court approval.

The finance ministry's rationale for excluding fast-track demergers centers on concerns about potential valuation manipulation without court oversight. However, experts argue this approach contradicts the ease of doing business agenda, forcing genuine taxpayers to choose between transaction efficiency and tax benefits.

Contingent Consideration Clarity

Experts emphasize the need for clear taxation guidelines on earn-out, profit-linked, or contingent consideration arrangements that have become increasingly common in M&A transactions. These arrangements tie part of the sale consideration to achieving specific profitability or financial milestones.

The current legal framework lacks clarity on:

• Taxability of contingent payments
• Timing of taxation for such arrangements
• Treatment of milestone-based considerations

Foreign Company Merger Anomalies

The recommendations address existing inconsistencies in foreign company merger taxation. While foreign companies enjoy capital gains tax exemptions on direct or indirect share transfers during mergers with other foreign companies, shareholders of the amalgamating company face potential capital gains liability on share swaps.

This creates an anomaly compared to domestic mergers, which provide exemptions at both company and shareholder levels.

Capital Gains Tax Rate Concerns

The recent capital gains tax regime rationalization introduced higher long-term capital gains tax rates, which experts suggest adversely impacts investor returns and exit efficiency. The increased rates potentially drive investors toward jurisdictions with more favorable tax regimes.

Key concerns include:

• Reduced post-tax returns for investors
• Decreased competitiveness with other investment destinations
• Impact on foreign capital attraction

Experts recommend reducing capital gains tax rates, suggesting restoration of the earlier 10.00% rate to improve India's competitive position in attracting foreign investment.

Strategic Implementation Timeline

With the Income-tax Act, 2025 set for April 1, 2026 implementation, Budget 2026 represents the final opportunity to incorporate these amendments before the new framework takes effect. The recommendations aim to position India as a preferred destination for cross-border M&A activities while maintaining regulatory integrity and supporting corporate growth objectives.